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The purpose of this review is to analyze all existing theories of the capital structure (with their advantages and disadvantages) in order to understand all aspects of the problem and make correct management decisions in practice. The role of the capital structure is that the correct determination of the optimal capital structure allows the company’s management to maximize the capitalization of the company and the long-term goal of the function of any company. The review examines the state of the capital structure and capital cost theory from the middle of the last century, when the first quantitative theory was created, to the present. The two main theories, Modigliani–Miller (MM) and Brusov–Filatova–Orekhova (BFO), are discussed and analyzed, as well as their numerous modifications and generalizations. Additionally, discussed is the latest stage in the development of the theory of capital structure, which began a couple of years ago and is associated with the adaptation of the two main theories of capital structure (Brusov–Filatova–Orekhova and Modigliani–Miller) to establish the practice of the function of companies. This generalization takes into account the real conditions of the work of the companies. It was noted that taking into account some effects that are present in economic practice (such as variable income, frequent payments of tax on income, advance payments of tax on income, etc.) brings both theories closer, and even the Modigliani–Miller theory, with all its many limitations, becomes more applicable in economic practice. However, it should be remembered that the Modigliani–Miller theory is only true for perpetual companies, while the BFO theory is valid for companies of any age, and from this point of view, they never coincide. Full article

To expand the applicability in practice of the modern theory of cost and capital structure, the theory of Brusov–Filatova–Orekhova (BFO), which is valid for companies of arbitrary age, is generalized for the case of variable income. The generalized theory of capital structure can be successfully applied in corporate finance, business valuation, banking, investments, ratings, etc. income. A generalized Brusov–Filatova–Orekhova formula for the weighted average cost of capital, WACC, is derived using a formula in MS Excel, where the role of the discount rate shifts from WACC to WACC–g (here g is the growth rate) for financially dependent companies and k₀–g for financially independent companies is shown. A decrease in the real discount rates of WACC–g and k₀–g with g ensures an increase in the company’s capitalization with g. The tilt of the equity cost curve, k_e(L), increases with g. Since the cost of equity justifies the amount of dividends, this should change the dividend policy of the company. It turns out that for the growth rate g < g*, the tilt of the curve k_e(L) becomes negative. This qualitatively new effect, discovered here for the first time, can significantly change the principles of the dividend policy of the company. The obtained results are compared with the results of the MM theory with variable income. Full article

In practice, profit tax payments are (1) made more frequently than annually and (2) can be made in advance. To study the influence of these two factors on the financial indicators of a company, we generalized the Brusov–Filatova–Orekhova (BFO) theory for the case of advance profit tax payments with an arbitrary frequency for the first time. Using modified BFO formulae, we showed that all financial indicators of a company, such as company value, the weighted average cost of capital (WACC) and equity cost (ke), depend on the frequency of the profit tax payments. We found that the WACC increased with the payments and the company value decreased with the payments. This meant that more infrequent payments could be beneficial for the company. The tilt angle of the equity cost (ke(L)) also increased with the payments. Depending on the age of the company, the equity cost either decreased with L for all payment frequencies or increased for some frequencies. We compared the obtained results to those that we described recently for profit tax payments at the end of the financial period and found them to be totally different. We found that in spite the fact that the WACC decreased with the payments and the company value increased with the payments, the WACC value in this case turned out to be bigger and the company value turned out to be smaller than in the case of advance profit tax payments of any frequency. This underlined the importance of advance profit tax payments. Regulator recommendations were also developed to encourage the practice of advance profit tax payments due to the understanding of the benefits of this for both parties: the companies and the state. A new effect was discovered: the decrease in equity cost with an increase in the level of leverage (L). Full article

The modern capital cost and capital structure theory—the Brusov–Filatova–Orekhova (BFO) theory and its perpetuity limit, the Modigliani–Miller theory—describe the case of the payments of income tax at the end of the year. However, in practice, companies could make these payments in advance. Recently, the Modigliani–Miller theory has been modified for the case of advanced payments of income tax and has shown that the obtained results are quite different from ones in the “classical” Modigliani–Miller theory. In the current paper, for the first time, we modify the Brusov–Filatova–Orekhova (BFO) theory for the case of advanced payments of income tax and show that the impact of the transition to advance payments is much more significant than in the case of a perpetuity limit (the MM theory) and even leads to a qualitatively new effect in the dependence of equity cost on leverage. An important conclusion drawn in this paper is that the tax shield is very important, and the way it is formed (payments at the end of the year or in advance) leads to very important consequences, changing all the financial indicators of the company, such as the cost of raising capital and company value and radically changing the company’s dividend policy. Full article

Both main theories of capital cost and capital structure—the Brusov–Filatova–Orekhova (BFO) theory and its perpetuity limit, the Modigliani–Miller theory—consider the payments of tax on profit once per year, while in real economy these payments are made more frequently (semi-annual, quarterly, monthly etc.). Recently the Modigliani–Miller theory has been generalized by us for the case of tax on profit payments with an arbitrary frequency. Here for the first time, we generalized the Brusov–Filatova–Orekhova (BFO) theory for this case. The main purpose of the paper is bringing the BFO theory closer to economic practice, taking into account one of the features of the real functioning of companies, the frequent payments of tax on profit. We derive modified BFO formulas and show that: (1) All BFO formulas change; (2) all main financial parameters of the company, such as company value, V, equity cost, k_e, and the weighted average cost of capital, WACC, depend on the tax on profit payments frequency. The increase of the frequency of payments of income tax leads to a decrease in the cost of attracting capital, WACC, and increase in the capitalization of the company, V. At a certain age n of the company and at certain frequency of tax on profit payments p, a qualitatively new anomalous effect takes place: the equity cost, k_e(L), decreases with an increase in the level of leverage L. This radically changes the company′s dividend policy, since the economically justified amount of the dividends is equal to the cost of equity. For both parties–for the company and for the tax regulator more frequent payments of tax on profit are beneficial: for the company, because this increases the company capitalization, and for the tax regulator, because earlier payments are beneficial for it due to the time value of money. Full article